System and method for enabling arbitrage between market price and underlying value of exchange-traded fund shares

ABSTRACT

A system and method is provided for administering an actively managed fund having shares tradable on an exchange, to support efficient secondary market trading. A Fund Module defines an actively managed ETF. A Portfolio Module tracks a portfolio held by the ETF while maintaining confidentiality of at least a portion thereof. A Basket Module publishes Creation and Redemption Baskets including a subset of the fund portfolio. A Current Valuation Module calculates a current Intraday NAV for the portfolio and Baskets throughout a trading day. A Swap Module provides for periodic entry and exit from NAV Swaps between an ETF Party and Swap Counterparties, who exchange payments based on performance of the fund portfolio and the Fund Basket. A Creation/Redemption Module permits creations and redemptions of ETF shares in exchange for the Fund Basket. Arbitrage is permitted between ETF share price and Intraday NAV without full portfolio disclosure.

RELATED APPLICATION

This application is a Divisional of U.S. patent application Ser. No.16/438,117, entitled System and Method for Enabling Arbitrage betweenMarket Price and Underlying Value of Exchange-Traded Fund Shares, filedon Jun. 11, 2019, which claims priority to U.S. Provisional PatentApplication Ser. No. 62/769,394, entitled System and Method for EnablingArbitrage between Market Price and Underlying Value of Exchange-TradedFund Shares, filed on Nov. 19, 2018 and is a Continuation-In-Part ofU.S. patent application Ser. No. 13/889,587, entitled System and Methodfor Enabling Arbitrage between Market Price and Underlying Value ofExchange-Traded Fund Shares in the Absence of Full Portfolio DisclosureUsing Intraday Creations and Redemptions and/or Special Dealer Shares,filed on May 8, 2013, which claims the benefit of U.S. ProvisionalPatent Application Ser. No. 61/644,017, entitled Method for EffectingArbitrage Between Market Price and Underlying Value of Exchange-TradedFund Shares in the Absence of Full Portfolio Disclosure Using IntradayCreations and Redemptions and/or Special Dealer Shares, filed on May 8,2012, the contents all of which are incorporated herein by reference intheir entireties for all purposes. This application is also related toU.S. Pat. No. 10,102,573, entitled System and Method for EnablingArbitrage between Market Price and Underlying Value of Exchange-TradedFund Shares in the Absence of Full Portfolio Disclosure Using IntradayNet Asset Value Swaps, filed on May 8, 2013 and issued on Oct. 16, 2018,which claims the benefit of U.S. Provisional Patent Applications: Ser.No. 61/643,999, entitled Method for Effecting Arbitrage Between MarketPrice and Underlying Value of Exchange-Traded Fund Shares in the Absenceof Full Portfolio Disclosure Using Intraday Net Asset Value Swaps, filedon May 8, 2012; and Ser. No. 61/647,583, entitled Method for EffectingArbitrage Between Market Price and Underlying Value of Exchange-TradedFund Shares in the Absence of Full Portfolio Disclosure Using IntradayNet Asset Value Swaps, filed on May 16, 2012, the contents all of whichare incorporated herein by reference in their entireties for allpurposes.

BACKGROUND Technical Field

This invention relates to asset management and administration, and moreparticularly to an automated system and method for enabling arbitragebetween the market trading prices of an ETF and its underlying real-timeportfolio values in the absence of full current portfolio disclosure.

Background Information

Throughout this application, various publications, patents and publishedpatent applications are referred to by an identifying citation. Thedisclosures of the publications, patents and published patentapplications referenced in this application are hereby incorporated byreference into the present disclosure.

Exchange-traded funds (“ETFs”) are one of the most significant financialmarket innovations of the past quarter century. ETFs give retail andinstitutional investors the ability to buy and sell share interests inportfolios of equities, fixed income securities and other investmentsthrough market transactions in which trading prices of ETF shares arelinked to the current value of the underlying portfolio investmentsthrough an arbitrage mechanism. In the United States, ETFs areregistered open-end investment companies or unit investment trusts thatoperate in reliance on a series of exemptions granted by the U.S.Securities and Exchange Commission (“SEC”), beginning in 1993, tocertain provisions of the Investment Company Act of 1940, as amended(“Investment Company Act”). Unaffiliated third-party investors normallybuy and sell ETF shares through broker-dealers in secondary markettransactions on an exchange. Share transactions directly with the ETFitself are restricted to broker-dealers designated as “AuthorizedParticipants” who may purchase and redeem “Creation Unit” aggregation ofshares in transactions priced as of the time the net asset value (“NAV”)of the ETF is next determined (generally 4:00 pm eastern time eachbusiness day). Most ETFs effect direct purchases and redemptionsprimarily through “in kind” delivery of portfolio securities, ratherthan in cash. Market makers and other arbitrageurs who buy and sell ETFshares on the open market may seek to earn arbitrage profits by enteringinto offsetting positions in the underlying securities, and usingpurchases and redemptions of ETF shares in Creation Unit quantitiesthrough Authorized Participants to manage their inventories of ETFshares and underlying portfolio securities.

Compared to conventional mutual funds, ETFs have a number ofdistinguishing features that may benefit investors: (1) ETF shares canbe bought and sold on the secondary market throughout each trading dayat current market-determined prices, whereas mutual fund sharestypically can be bought and sold only once each day, in transactionsdirectly with the issuing fund at prices based on the fund's dailyclosing NAV; (2) ETFs are typically less expensive to own (i.e., havelower total expense ratios) than comparably invested mutual funds,primarily due to lower embedded shareholder administration anddistribution costs; (3) ETFs typically incur lower trading costs thancomparably invested mutual funds, based on ETFs' customary use ofin-kind transfers of portfolio securities in connection with purchasesand redemptions of shares (in Creation Unit quantities by or throughAuthorized Participants) rather than transacting with purchasing andredeeming shareholders in cash, the general practice among mutual funds;and (4) ETFs may achieve higher levels of tax efficiency than comparablyinvested mutual funds by using in-kind distributions of appreciatedportfolio securities to redeeming shareholders to remove the securitiesfrom their portfolios without the ETF realizing capital gains.

A well-recognized adverse tax effect of investing in mutual funds isthat a fund's sales of appreciated securities to raise cash to meetredemptions can trigger capital gains realizations for the fund's othershareholders. Funds (including ETFs) that utilize in-kind distributionsof securities to meet redemptions can largely avoid such events. Section852(b)(6) of the Internal Revenue Code provides that a fund'sdistributions of appreciated property to meet shareholder redemptionrequests do not result in recognition by the fund of capital gains onthe distributed property. The fact that ETF creations and redemptionstake place only in Creation Unit aggregations of shares effected throughdesignated Authorized Participants gives ETFs a practical ability toutilize in-kind redemptions (and achieve the associated tax benefits)that broadly held mutual funds generally do not have.

As mentioned above, the linkage between the market trading price andcurrent NAV of an ETF is based on an arbitrage mechanism, and derivesfrom the ability of ETF market makers and other arbitrageurs to earnarbitrage profits by entering into transactions in an ETF's underlyingportfolio securities or other market instruments to offset the long orshort market exposures they take on when they buy or sell ETF shares inthe secondary market and/or create or redeem Creation Units of ETFshares through an Authorized Participant. Generally speaking, thesimpler and more reliable the arbitrage profit opportunity available toan ETF's arbitrageurs, the tighter will be the ETF's bid-ask spread insecondary market trading and the narrower the premium or discount ofmarket trading prices to underlying portfolio value.

For ETFs that engage in active investment strategies, there is apotential conflict between the portfolio disclosures required tofacilitate the arbitrage that supports efficient secondary markettrading and the desire to maintain the confidentiality of the ETF'scurrent portfolio trading information.

For this reason, active managers have to date largely avoidedintroducing their strategies as transparent ETFs because the requireddaily holdings disclosures can facilitate front-running of portfoliotrades and enable copycat investors to replicate a fund's portfoliopositioning.

There is therefore a need for a system and method for enabling arbitragebetween the market trading prices of an ETF and its underlying real-timeportfolio values in the absence of full current portfolio disclosure.

SUMMARY

In one aspect of the invention, a system is provided for administeringan actively managed fund having shares tradable on an exchange, tosupport efficient secondary market trading. The system includes a FundModule configured to define an actively managed exchange traded fund(ETF) having a plurality of ETF shares available for sale, the pluralityof ETF shares being tradable on one or more secondary markets. APortfolio Module tracks a fund portfolio of assets held by the fundwhile maintaining confidentiality of at least a portion of the fundportfolio. A Basket Module identifies and publishes a Fund Basket in theform of Creation and Redemption Baskets including a subset of the assetsheld by the fund. A Current Valuation Module calculates a currentintraday net asset value (Intraday NAV) of the assets held by the ETFand of the Fund Basket, the Intraday NAV being calculated periodicallythroughout a trading day. A Swap Module establishes terms, and providesfor the periodic entry into and exit from, NAV Swaps between an ETFParty and Swap Counterparties, who exchange payments based onperformance of the fund portfolio and the Fund Basket. ACreation/Redemption Module permits creations and redemptions of ETFshares in exchange for the Fund Basket. The system enables a qualifiedparty to effect arbitrage between a current market price of said fundshares and the Intraday NAV in absence of full disclosure of said fundportfolio, to support efficient secondary market trading.

In another aspect of the invention, a method is provided for enablingarbitrage between the market price and the underlying value ofExchange-Traded Fund (ETF) shares in the absence of full portfoliodisclosure, to support efficient secondary market trading. The methodincludes defining, with a Fund Module, an actively managed ETF havingETF shares available for sale, and which are tradable on a secondarymarket. The method includes tracking, with a Portfolio Module, aportfolio of assets held by the fund while maintaining confidentialityof at least a portion of the fund portfolio. A Fund Basket, includingCreation and Redemption Baskets, is identified and published, with aBasket Module, the Fund Basket including a subset of the assets held bythe fund. An Intraday NAV of the fund assets is calculated, with aCurrent Valuation Module. The Intraday NAV is calculated periodicallythroughout a trading day. A Swap Module establishes terms of, andprovides for the periodic entry into and exit from, NAV Swaps between anETF Party and Swap Counterparties, wherein the ETF Party and SwapCounterparties exchange payments based on performance of the fundportfolio and the Fund Basket. A qualified party selectively creates andredeems ETF shares, using a Creation/Redemption Module, wherein thequalified party is permitted to effect arbitrage between a currentmarket price of said ETF shares and the Intraday NAV in absence of fulldisclosure of said fund portfolio, to support efficient secondary markettrading.

In yet another aspect of the invention, a method is provided foreffecting arbitrage between market price and underlying value ofExchange-Traded Fund (ETF) shares in the absence of full portfoliodisclosure, to support efficient secondary market trading of the ETFshares. This method includes communicably coupling a qualified partycomputer to the aforementioned system, capturing, with the qualifiedparty computer, the current Intraday NAV published by the CurrentValuation Module, the contents of the Fund Basket published by theBasket Module, and the current market price of the ETF shares on asecondary market. In the event the current market price exceeds theIntraday NAV, the method includes borrowing ETF shares from a SecuritiesLender in exchange for posting collateral, selling the borrowed ETFshares on a secondary market, purchasing shares of the Fund Basket in aquantity corresponding to the borrowed ETF shares, and entering into anNAV Swap with the ETF Party, using the Swap Module, wherein the NAV Swaphas a notional value corresponding to a value of the borrowed ETFshares, and the ETF Party and qualified party exchange payments based onperformance of the fund portfolio and the Fund Basket. Aspects of thismethod may be repeated until a Creation Unit of ETF Shares have beenborrowed, wherein ETF shares are then created in exchange for acorresponding quantity of the Fund Basket assets which are purchasedusing proceeds from the aforementioned sale of the borrowed ETF shares.The created ETF shares are then used to replace the borrowed shares,wherein the posted collateral is returned.

In still another aspect of the invention, a method is provided foreffecting arbitrage between market price and underlying value ofExchange-Traded Fund (ETF) shares in the absence of full portfoliodisclosure, to support efficient secondary market trading of the ETFshares. This method includes communicably coupling a qualified partycomputer to the aforementioned system and capturing the current IntradayNAV published by the Current Valuation Module, the Fund Basket publishedby the Basket Module, and the current market price of the ETF shares ona secondary market. In the event the Intraday NAV exceeds the currentmarket price, the method includes purchasing ETF shares on a secondarymarket, borrowing shares of the Fund Basket in a quantity correspondingto the purchased ETF shares, and selling the borrowed shares on asecondary market. The qualified party may then enter into an NAV Swapwith the ETF Party, using the Swap Module, at a notional valuecorresponding to a value of the purchased ETF shares, in which the ETFParty and qualified party exchange payments based on performance of thefund portfolio and the Fund Basket. Aspects of this method may berepeated until a Redemption Unit of ETF Shares has been purchased,followed by transacting with the Creation/Redemption Module to redeemthe purchased ETF shares in exchange for a corresponding quantity of theFund Basket assets which are used to replace the borrowed Fund Basketassets.

The features and advantages described herein are not all-inclusive and,in particular, many additional features and advantages will be apparentto one of ordinary skill in the art in view of the drawings,specification, and claims. Moreover, it should be noted that thelanguage used in the specification has been principally selected forreadability and instructional purposes, and not to limit the scope ofthe inventive subject matter.

BRIEF DESCRIPTION OF THE DRAWINGS

The present invention is illustrated by way of example and notlimitation in the figures of the accompanying drawings, in which likereferences indicate similar elements and in which:

FIG. 1A is a block diagram of an embodiment of a master-feeder system ofthe present invention;

FIG. 1B is a diagrammatic representation of an embodiment of anautomated fund system within which the embodiment of FIG. 1A may beincorporated;

FIG. 1C is a block diagram of a portion of the embodiment of FIG. 1B;

FIG. 2A is a functional block diagram of various transactional aspectsof a system and method of the present invention;

FIG. 2B is a functional block diagram of various transactional aspectsof a system and method of the present invention;

FIG. 2C is a functional block diagram of various transactional aspectsof a system and method of the present invention;

FIG. 2D is a functional block diagram of various transactional aspectsof a system and method of the present invention; and

FIG. 3 is a block diagram of one embodiment of a computer system usablewith any of the embodiments of present invention.

DETAILED DESCRIPTION

In the following detailed description, reference is made to theaccompanying drawings that form a part hereof, and in which is shown byway of illustration, specific embodiments in which the invention may bepracticed. These embodiments are described in sufficient detail toenable those skilled in the art to practice the invention, and it is tobe understood that other embodiments may be utilized. It is also to beunderstood that structural, procedural and system changes may be madewithout departing from the spirit and scope of the present invention. Inaddition, well-known structures, circuits and techniques have not beenshown in detail in order not to obscure the understanding of thisdescription. The following detailed description is, therefore, not to betaken in a limiting sense, and the scope of the present invention isdefined by the appended claims and their equivalents.

General Overview

Aspects of the present invention address the aforementioned conflict byenabling arbitrage between the market trading prices of an ETF and itsunderlying real-time portfolio values in the absence of full currentportfolio disclosure. Particular embodiments of the invention includemechanisms for:

-   -   disclosing an ETF's full portfolio holdings of securities, other        market instruments and cash (“ETF Portfolio”) at a frequency and        time lag sufficient to preserve the confidentiality of its        current portfolio trading information.    -   disclosing the composition of the basket of securities and cash        to be used to effect creations and redemptions of Creation Units        of ETF shares (“Basket Portfolios”) on a particular day prior to        the opening of market trading on that day.    -   disclosing the fees that apply to creations and redemptions of        Creation Units of ETF shares on a particular day prior to the        opening of market trading on that day.    -   publicly disseminating an ETF's indicative intraday values        (“IIVs”) only at such frequency and with such specificity as to        avoid indirect disclosure of portfolio holdings information that        the ETF seeks to remain confidential.    -   periodically calculating, throughout periods of an ETF's market        trading, real-time current NAVs of (a) the ETF Portfolio, (b)        its creation and redemption Basket Portfolios and (c) any Beta        Patch Portfolios as currently specified by the ETF.        Alternatively, or in addition, continuously calculate the        real-time current NAVs of portfolios (the “Variance Portfolios”)        representing the variance between the current ETF Portfolio on        the one hand and the Basket Portfolios and any attached Beta        Patch Portfolios (together, the “Modified Basket Portfolios”) on        the other hand.    -   establishing swaps (“NAV Swaps”) between an ETF (or an affiliate        or other designee thereof) (collectively, the “ETF Party”) and        arbitrageurs in its shares (e.g., broker-dealers serving as        market makers), the terms of swap transactions being: (a) the        ETF Party pays or receives the return of the ETF Portfolio and        the counterparty pays or receives the return of the ETF's        currently specified creation or redemption Basket Portfolio (or        alternatively, the Modified Basket Portfolio) or (b) the ETF        Party pays to or receives from the counterparty the return of a        specified Variance Portfolio.    -   enabling ETF market makers and other eligible arbitrageurs to        expeditiously enter into long and short positions in NAV Swaps        with the ETF Party as counterparty in real-time throughout        periods of ETF market trading.

These aspects may be implemented in connection with a stand-alone fundor alternatively, with a master-feeder (also variously referred to as afund-of-fund) arrangement with one or more master funds (masterportfolios) having both mutual fund and ETF feeder funds, as will bediscussed in greater detail hereinbelow.

In the following detailed description, reference is made to theaccompanying drawings that form a part hereof, and in which is shown byway of illustration, specific embodiments in which the invention may bepracticed. These embodiments are described in sufficient detail toenable those skilled in the art to practice the invention, and it is tobe understood that other embodiments may be utilized. It is also to beunderstood that structural, procedural and system changes may be madewithout departing from the spirit and scope of the present invention. Inaddition, well-known structures, circuits and techniques have not beenshown in detail in order not to obscure the understanding of thisdescription. The following detailed description is, therefore, not to betaken in a limiting sense, and the scope of the present invention isdefined by the appended claims and their equivalents.

Where used in this disclosure, the term “mutual fund” refers to open-endinvestment companies registered under the Investment Company Act of1940, as amended (Investment Company Act). Mutual funds permit theirshareholders to redeem their share interests each business day at aprice based on the fund's next-determined net asset value.

The term “ETF” and/or “exchange-traded fund” refers to registeredopen-end investment companies or unit investment trusts that operate inreliance on a series of exemptions granted by the U.S. Securities andExchange Commission (SEC) beginning in 1993 to certain provisions of theInvestment Company Act. Retail and most institutional investors normallybuy and sell ETF shares through secondary market transactions on anexchange. Transactions with the ETF itself (i.e., primary markettransactions) are restricted to broker-dealers designated as “AuthorizedParticipants” who purchase and redeem “Creation Unit” aggregation ofshares from the ETF at net asset value. Market trading prices of ETFshares are linked to current net asset values by an arbitrage mechanism.Market makers and other arbitrageurs who buy and sell fund shares on theopen market may earn arbitrage profits by entering into offsetting hedgepositions in the underlying securities and other instruments, and usingcreations and redemptions of ETF shares in Creation Unit quantitiesthrough Authorized Participants to manage their ETF and hedge inventory.

The term “computer” is meant to encompass a workstation, personalcomputer, personal digital assistant (PDA), wireless telephone, or anyother suitable computing device including a processor, a non-transitorycomputer readable medium upon which computer readable program code(including instructions and/or data) may be disposed, and a userinterface. The term “server” is intended to refer to a computer-relatedcomponent, including hardware, software, and/or software in execution.For example, a server may include, but is not limited to being, aprocess running on a processor, a processor including an object, anexecutable, a thread of execution, a program, and a computer. Moreover,the various components may be localized on one computer and/ordistributed between two or more computers. The term “real-time” refersto sensing and responding to external events nearly simultaneously(e.g., within milliseconds or microseconds) with their occurrence, orwithout intentional delay, given the processing limitations of thesystem and the time required to accurately respond to the inputs.

Systems and methods embodying the present invention may be programmed inany suitable language and technology, such as, but not limited to: C++;Visual Basic; Java; VBScript; Jscript; BCMAscript; DHTM1; XML and CGI.Alternative versions may be developed using other programming languagesincluding, Hypertext Markup Language (HTML), Active ServerPages (ASP)and Javascript. Any suitable database technology may be employed, suchas, but not limited to, Microsoft SQL Server or IBM AS 400+.

As mentioned above, aspects of the present invention include a systemand method for effecting arbitrage between the market trading prices ofan ETF and its underlying real-time portfolio values in the absence offull current portfolio disclosure. Embodiments of the invention includemechanisms configured to implement the following:

-   -   Disclose an ETF's full portfolio holdings of securities, other        market instruments and cash (“ETF Portfolio”) at a frequency and        time lag sufficient to preserve the confidentiality of its        current portfolio trading information.    -   In the U.S., funds registered under the Investment Company Act        are required to provide public disclosure of their full        portfolio holdings at least once each quarter, with a time lag        of not more than 60 days. Since 2008, the SEC has approved        exemptive applications for a number of new ETFs following active        (i.e., non-index) investment strategies with the stipulation        that the funds must disclose on a public website their full        portfolio holdings as of the end of each business day prior to        the start of market trading on the next business day. Although a        handful of fully transparent active ETFs that follow fixed        income strategies have been commercially successful, no fully        transparent active ETF that invests in equity securities has to        date achieved significant commercial success. A common practice        among actively managed mutual funds is to disclose portfolio        holdings as of each month end, with a 30-day lag. In aspects of        the present invention, an ETF would provide portfolio disclosure        at least sufficient to meet the Investment Company Act        requirements and may provide disclosures more frequently and        with such shorter time lag as determined by the ETF's investment        advisor to be consistent with shareholder protection. Under most        circumstances, the primary disclosure concern should be to        maintain the confidentiality of fund trading information, as        opposed to fund holdings information. Once a fund's trading        program (whether buying or selling) in a particular security is        completed, disclosing the fund's ownership position in that        security should generally present little or no risk to the fund.    -   Disclose the composition of the basket of securities and cash to        be used to effect creations and redemptions of Creation Units of        ETF shares (“Basket Portfolios”) on a particular day prior to        the opening of market trading on that day.    -   An ETF's creation and redemption Basket Portfolios will        generally vary from the current ETF Portfolio as the ETF's        advisor deems appropriate to maintain the confidentiality of        current portfolio trading information. Securities being        purchased for the ETF Portfolio will, for example, generally not        be included in Basket Portfolios until purchases are completed.        Securities being sold from the ETF Portfolio may not be removed        from the Basket Portfolios until sales are substantially        completed. Basket Portfolios may include positions in cash in        excess of the ETF's actual cash positions to preserve the        confidentiality of pending transactions and to substitute for        holdings for which in-kind delivery is not practicable or deemed        not to be in the best interest of shareholders. Some embodiments        of the present invention may use different Basket Portfolios for        creations and redemptions; other embodiments may use the same        Basket Portfolio for both creations and redemptions. In        particular embodiments, the Basket Portfolios may include        securities positions that are not currently in the ETF Portfolio        or may consist entirely of cash. Certain embodiments may permit        a creating or redeeming shareholder to substitute cash, other        securities and/or other market instruments for all or a portion        of the Basket Portfolio positions on such terms and conditions        as set forth by the ETF or its advisor.    -   An ETF may elect to disclose the Basket Portfolios for a        particular day prior to the close of market trading on the        preceding business day.    -   In particular embodiments, an ETF may, in conjunction with its        Basket Portfolio disclosures, identify and disclose one or more        executable market instruments or combinations of market        instruments (“Beta Patch Portfolios”, which may include index        ETFs or index futures contracts) representing the incremental        aggregate market exposure of the ETF's current or desired        portfolio composition versus the creation and redemption Basket        Portfolios. Embodiments using different creation and redemption        Basket Portfolios may have separate Beta Patch Portfolios for        each.    -   Disclose the fees that apply to creations and redemptions of        Creation Units of ETF shares on a particular day prior to the        opening of market trading on that day.    -   The fees imposed by an ETF in connection with creations and        redemptions of Creation Units of shares will generally increase        or decrease with changes in the estimated cost to the ETF of        trading to conform the Basket Portfolios to the ETF's desired        portfolio composition. The lower the correspondence between the        Basket Portfolio holdings and the ETF's desired holdings and the        higher the estimated conversion trading costs, generally the        higher will be the associated creation and redemption fees that        are assessed. Some embodiments of the present invention may        apply the same fee schedule to both creation and redemptions;        other embodiments may use different fee schedules for creations        and redemptions. Fees for creating or redeeming multiple        Creation Units on a given day may differ from fees in connection        with creating or redeeming a single Creation Unit, and the        assessed fees per Creation Unit created or redeemed may also        vary with the number of Creation Units created or redeemed.    -   ETFs that permit the substitution of cash, other securities        and/or other market instruments for all or a portion of their        Basket Portfolio positions may specify the amount of any        additional fees that apply to such substitutions as part of the        daily creation and redemption fee schedule. Alternatively, such        information may be communicated directly to the creating or        redeeming shareholder to whom it applies.    -   Publicly disseminate an ETF's indicative intraday values        (“IIVs”) only at such frequency and with such specificity as to        avoid indirect disclosure of portfolio holdings information that        the ETF seeks to remain confidential.    -   Current SEC policy generally requires an ETF to provide for the        public dissemination of its IIVs throughout all periods of the        ETF's market trading at approximately regular intervals        averaging not more than 15 seconds. An exception is that ETFs        whose securities holdings trade outside normal U.S. market hours        are generally required to provide for dissemination of public        IIVs throughout all periods of ETF market trading at        approximately regular intervals averaging not more than 60        seconds. IIVs (sometimes referred to as “Underlying Trading        Values,” “Indicative Optimized Portfolio Values (IOPVs),” or        “Intraday Values”) are designed to give investors a close sense        of the relationship between an ETF's current market trading        price and the value of its underlying holdings.    -   Those skilled in the art will recognize that Index ETFs are        permitted to base their publicly disseminated IIVs on the        current composition of their creation and/or redemption Basket        Portfolios, which, if not an exact replication, are generally a        close proxy for the ETF's current holdings. The SEC requires        actively managed ETFs to base publicly disseminated IIVs on        their actual portfolio holdings of the close of trading on the        previous business day. Using holdings as of the market close on        the previous business day to determine IIVs is consistent with        the mutual fund and ETF industry convention for how end-of-day        NAVs are calculated. Under this convention, an ETF's market        transactions of a given day do not change the securities used in        determining its IIVs (and its end-of-day NAV) until the        following business day. Publicly disseminated IIVs are generally        calculated based on the most recent market trading prices of the        constituent securities as of the time of dissemination, but may        reflect bid-offer midpoints or other measures of current value        at such time.    -   Publicly disseminated IIVs are required to be expressed at least        to the nearest one cent ($0.01) per ETF share. In practice, many        ETFs currently provide regular IIV disclosures expressed to the        nearest one hundredth of a cent ($0.0001) per ETF share.    -   In particular aspects of the present invention, an ETF would        provide for public dissemination of its IIVs at least sufficient        to meet SEC requirements and the general informational needs of        investors, but would exercise care to avoid indirect disclosures        of portfolio holdings information that the ETF seeks to remain        confidential. (The skilled artisan will recognize that the        current holdings of an investment portfolio can be deconstructed        using established computational techniques if the intraday        values of the portfolio and its opportunity set of potential        investments are known with sufficient precision and a sufficient        number of intraday valuation data points are available.        Generally speaking, the narrower the range of a portfolio's        potential investments, the fewer valuation data points needed to        deconstruct its current holdings.) Various embodiments of the        present invention may use one or more of the following        approaches to avoid the inadvertent disclosure of confidential        portfolio information through the public dissemination of        IIVs: (a) limiting the frequency of public IIV disclosures to        not more than every 15 seconds; (b) limiting the precision of        public IIV disclosures to not more than the nearest one cent        ($0.01) per ETF share; and (c) establishing and maintaining ETF        share prices at comparatively low levels (e.g., $10-20 per share        versus $50-100 per share).    -   Throughout all periods of an ETF's market trading, continuously        calculate the real-time current NAVs of (a) the ETF        Portfolio, (b) its creation and redemption Basket Portfolios        and (c) any Beta Patch Portfolios as currently specified by the        ETF. Alternatively, or in addition, the system may continuously        calculate the real-time current NAVs of portfolios (the        “Variance Portfolios”) representing the variance between the        current ETF Portfolio on the one hand and the Basket Portfolios        and any attached Beta Patch Portfolios (together, the “Modified        Basket Portfolios”) on the other hand.    -   An ETF's intraday NAVs would be determined in a manner        consistent with the general practice among ETFs and mutual        funds: that is, by dividing the total assets of the ETF, less        liabilities, by the number of ETF shares currently outstanding.        Consistent with conventional industry practice, an ETF's        holdings for NAV-calculation purposes would be those positions        held as of the close of market trading on the previous business        day. Each “Reference Portfolio” position (the term “Reference        Portfolio” includes the ETF Portfolio, Basket Portfolio, Beta        Patch Portfolio, Modified Basket Portfolio and Variance        Portfolio) would be valued in accordance with an ETF's otherwise        conventional valuation procedures as disclosed in its current        prospectus. In this regard, valuations of constituent securities        may be based on most recent market trading prices, current        bid-offer midpoints or other measures of current value.    -   An ETF's intraday NAVs may be calculated more frequently (e.g.,        once each second) and with more precision (e.g., to four decimal        places per ETF share) than its publicly disseminated IIVs. To        avoid indirect disclosure of confidential ETF portfolio        information, intraday valuation information other than IIVs may        not be disseminated (except possibly with a sufficient time lag)        to the general public.    -   Establish swap agreements (“NAV Swaps”) between an ETF (or an        affiliate or other designee thereof) (collectively, the “ETF        Party”) and arbitrageurs in its shares (e.g., broker-dealers        serving as market makers) setting forth the terms of swap        transactions whereby: (a) the ETF Party pays or receives the        return of the ETF Portfolio and the counterparty pays or        receives the return of the ETF's currently specified creation or        redemption Basket Portfolio (or alternatively, the Modified        Basket Portfolio) or (b) the ETF Party pays to or receives from        the counterparty the return of a specified Variance Portfolio.    -   Embodiments of the present invention may provide for the returns        of a Reference Portfolio in an NAV Swap to be adjusted upward or        downward by a predetermined amount to reflect, for example, the        ETF Party's projection of the relative performance of the ETF        Portfolio versus a Basket Portfolio or Modified Basket Portfolio        (the “Alpha Patch Adjustment”), which adjustments may be reset        daily. As an example of an Alpha Patch Adjustment, assume that        an ETF Party believes that the fund's portfolio will achieve        returns that exceed those of its currently specified Modified        Basket Portfolio (assume here the same for both creations and        redemptions) by 0.01% (one basis point) per business day,        equivalent to approximately 2.50% (250 basis points) per year.        Assume further that an arbitrageur that is selling ETF shares in        the secondary market enters into a NAV Swap with the ETF Party        providing for the arbitrageur to pay to the ETF Party the return        of the Modified Basket Portfolio and receive from the ETF Party        the return of the ETF Portfolio, based on a notional value equal        to 10% of the value of the ETF's outstanding shares. If the ETF        Party's forecast of relative returns is correct, the NAV Swap        will reduce the ETF's returns by 0.001% (one-tenth basis point)        per day that the swap is outstanding unless a compensating Alpha        Patch Adjustment is incorporated into the terms of the NAV Swap.        Adding an Alpha Patch Adjustment to the terms of the NAV Swap        would increase the arbitrageur's costs to hedge its short        position in ETF shares by a known amount, which it would        normally seek to recoup by slightly increasing the market prices        at which it sells ETF shares in the secondary market.    -   Embodiments of the present invention may also provide that the        Reference Portfolios and Alpha Patch Adjustments for NAV Swaps        that extend over multiple days will automatically update each        business day to their current composition and values.    -   Embodiments of the present invention that provide for an        affiliate of the ETF (such as its investment advisor,        administrator, custodian or a broker-dealer subsidiary of any of        the foregoing) or other designated third party to serve as the        ETF Party in NAV Swap transactions will generally require the        ETF Party to exercise reasonable care to avoid disclosure of        confidential fund information and to utilize such information in        a manner consistent with its obligations as a fiduciary of the        fund.    -   Enable ETF market makers and other eligible arbitrageurs to        expeditiously enter into long and short positions in NAV Swaps        with the ETF Party as counterparty in real-time throughout        periods of ETF market trading.    -   In embodiments of the present invention, eligible arbitrageurs        could (subject to potential limits on position size and        collateral requirements that may apply) enter into, add to,        reduce or eliminate NAV Swap positions with the ETF Party at any        time when the ETF is open for market trading.    -   By adjusting their NAV Swap positions at the same time as they        shrink or grow their net long and short positions in ETF shares        (through market purchases and sales of ETF shares and/or        creations and redemptions of Creation Unit quantities of        shares), arbitrageurs could readily convert their long or short        exposures to (less than fully transparent) ETF Portfolio market        risk into substantially equivalent long or short exposures to        (fully transparent) Basket Portfolio or Modified Basket        Portfolio positions. As a result, an ETF arbitrageur who uses        NAV Swaps to offset its transactions in ETF shares would have        substantially the same ability to hedge its market risk and earn        arbitrage profits as if the ETF Portfolio itself were fully        transparent.    -   Moreover, embodiments of the present invention may enable ETF        market makers and other arbitrageurs to adjust their hedge        positions corresponding to day-to-day changes in the ETF's        Basket Portfolios and Modified Basket Portfolios. In this        regard, particular embodiments provide automatic daily updates        of Reference Portfolios and Alpha Patch Adjustments used in NAV        Swaps, and disclosure of next-day Basket Portfolios and/or        Modified Basket Portfolios prior to the market close on each        trading day. These aspects may enable ETF arbitrageurs to        maintain hedged positions in ETF shares over multiple trading        days by entering into market transactions at or near the market        close each day.

As mentioned above, embodiments of the present invention incorporate NAVSwaps entered into between one or more arbitrageurs in an ETF's sharesand a specified ETF Party. The ETF Party may be the ETF itself or,alternatively, an affiliate of the ETF (such as its investment advisor,administrator, custodian or a broker-dealer subsidiary of any of theforegoing) or other designated third party.

In embodiments in which the ETF Party is not the ETF itself, the ETFParty may purchase and sell securities and other market instruments tohedge the risk exposures it assumes in connection with its NAV Swappositions. In respect of its NAV Swap hedging and other activities, theETF Party will generally be required to exercise reasonable care toavoid disclosure of confidential fund information and to utilize suchinformation in a manner consistent with obligations as a fiduciary ofthe fund.

In a simplified example that applies an embodiment of the presentinvention, an ETF market maker or other arbitrageur (“Market Maker”):(1) sells in the secondary market shares of an ETF that it has borrowed;(2) enters into a NAV Swap with the ETF Party with a notional valueequivalent to the value of the ETF shares sold short, paying the returnof the ETF's current Modified Basket Portfolio for creations (asadjusted for the Alpha Patch Adjustment that applies) and receiving thereturn of the ETF Portfolio; and (3) purchases an equivalent quantity ofthe securities constituting the ETF's Modified Basket Portfolio or amarket proxy for such securities. Thereafter, each time the Market Makermaterially changes its ETF share inventory position by buying or sellingshares of the ETF in the secondary market, it correspondingly adjustsboth the size of its NAV Swap position with the ETF Party and itsholdings of the Modified Basket Portfolio securities (or market proxy).When the Market Maker's short position in the ETF grows to equal aCreation Unit of shares, the Market Maker closes its position bytransacting with the ETF (through an Authorized Participant) to purchasea Creation Unit of ETF shares, which it delivers to close its borrowposition and settles by delivering to the ETF the securities and cashthat constitute the current Basket Portfolio and paying the creation feethat then applies. At the same time, the Market Maker terminates itsposition in the NAV Swap and sells the Beta Patch Portfolio positions(the difference between the Modified Basket Portfolio and the BasketPortfolio) on the secondary market.

Just as in conventional ETF market making, the Market Maker earnsarbitrage profits from this set of transactions to the extent that itsells ETF shares at an aggregate premium to their then-current valuesand/or purchases creation Basket Portfolio securities at an aggregatediscount to their current market values that, in total, exceed thecreation fee that applies plus the cost to the Market Maker ofestablishing and maintaining its hedge position. A substantivedifference versus conventional ETF market making is that the MarketMaker's ability to enter into and adjust in real time its NAV Swapposition allows it to continuously hedge its ETF share inventory withoutknowing the identity of the current ETF Portfolio.

Embodiments of the present invention may include ETFs that operate on astandalone basis, holding securities positions directly, oralternatively, ETFs that employ a master-feeder arrangement to invest inanother entity (“Master Portfolio”) that holds securities. Efficienciesin the management and administration of two or more funds of the samesponsor that follow similar investment programs can be achieved by thefunds investing in a common underlying Master Portfolio. The dailydisclosure requirements that apply to today's fully transparent activelymanaged ETFs make it impracticable for such ETFs to co-invest alongside(including through a master-feeder structure) similarly managed mutualfunds that are engaged in strategies for which daily holdings disclosureis not appropriate. By contrast, actively managed ETFs that utilize thepresent invention may invest alongside (including through amaster-feeder structure) similarly managed mutual funds of the samesponsor without compromising the confidentiality of the funds' currenttrading information.

Therefore, in a representative embodiment, a system for effectingarbitrage between market trading prices and underlying values of ETFshares in the absence of full portfolio disclosure using intraday NAVSwaps includes:

-   -   a module configured to determine and disclose daily creation and        redemption Basket Portfolios that differ from current ETF        Portfolio holdings as deemed appropriate by the ETF's advisor to        maintain the confidentially of current trading activity and to        exclude portfolios holdings for which in-kind delivery is not        practicable or deemed not to be in the best interest of fund        shareholders;    -   a module configured to determine and disclose daily creation and        redemption fees that generally will increase or decrease with        changes in the estimated cost to the ETF of trading to conform        the transferred Basket Portfolios to the ETF's desired portfolio        composition;    -   optionally, a module configured to determine and disclose Beta        Patch Portfolios representing the incremental aggregate market        exposure of the ETF's current or desired portfolio composition        versus the creation and redemption Basket Portfolios, Modified        Basket Portfolios that combine creation and redemption Basket        Portfolios and the associated Beta Patch Portfolios, and        Variance Portfolios that represent the difference between the        ETF Portfolio and the creation and redemption Basket Portfolios        or Modified Basket Portfolios;    -   optionally, a module configured to determine and integrate Alpha        Patch Adjustments into NAV Swaps executed by reference to the        current ETF Portfolio versus the current creation and redemption        Basket Portfolios or Modified Basket Portfolios and/or the        current Variance Portfolios;    -   a module configured to calculate the real-time current NAVs        (“Intraday NAVs) of the ETF Portfolio and the applicable        creation and redemption Basket Portfolios, Beta Patch        Portfolios, Modified Basket Portfolios and/or Variance        Portfolios throughout periods of an ETF's market trading;    -   an ETF Swap module configured to establish the terms of and        provide for the periodic entry into and exit from NAV Swaps by        the ETF Party with market makers in the ETF's shares and other        eligible arbitrageurs, through which the ETF Party and the swap        counterparties will make and receive payments based on the        performance of: (a) the ETF Portfolio versus a prescribed        creation or redemption Basket Portfolio or Modified Basket        Portfolio; or (b) a prescribed Variance Portfolio, in each case        referencing notional values as determined by the counterparty        that are intended to adjust up or down over the course of each        trading day as the counterparty adjusts its long or short        inventory positions in the ETF's shares and correspondingly        adjusts its Basket Portfolio or Modified Basket Portfolio        holdings or a proxy for them;    -   an ETF Party module communicably coupled to the ETF Fund module        and the ETF Swap module, in which the ETF Party module is        configured for being operated by the ETF, an affiliate of the        ETF (such as its investment advisor, administrator, custodian or        a broker-dealer subsidiary of any of the foregoing) or other        third party designated by the fund as ETF Party;    -   one or more processors configured to implement the ETF Fund        modules;    -   optionally, the ETF Fund module configured to use intraday NAV        Swaps and other elements of the present invention in combination        with (a) intraday creations and redemptions of Creation Units of        ETF shares and/or (b) a multi-class fund structure incorporating        at least one class of special dealer shares that may be created        and redeemed in single share or otherwise very small Creation        Unit sizes, such as described in U.S. patent application Ser.        No. 13/889,587 filed on May 8, 2013 which is fully incorporated        herein by reference for all purposes; and    -   optionally, the ETF Fund module configured for combining the ETF        Fund's investment program, using a master-feeder configuration,        with that of one or more other funds that follow the same        portfolio disclosure policies as the ETF Fund.

Particular aspects of the invention will now be described in greaterdetail with reference to the figures. Referring to FIG. 1A, one aspectof the present invention is embodied in a system 100 consisting ofMaster Portfolio 14 with two feeder feeds: Mutual Fund 12 and ETF 16.(Portfolio 14 may be an open-end investment company registered under theInvestment Company Act offering share interests on a private basis toaffiliated funds and certain other accredited investors.) Mutual Fund 12is a conventional open-end mutual fund, configured to issue and redeemshare interests each business day at the next-determined market-closingNAV, primarily in cash. ETF 16 differs from conventional ETFs byutilizing NAV Swaps and other aspects of the present invention tofacilitate efficient arbitrage between market trading prices and theunderlying value of its shares while maintaining the confidentiality ofcurrent portfolio trading information.

Those skilled in the art will recognize that Master portfolios operatingas open-end investment companies registered under the Investment CompanyAct are permitted to meet redemptions of affiliated feeder funds in kindthrough the distribution of portfolio securities, provided that certainconditions described in a “no-action” letter issued by the SEC staff inDecember 1999 are met. (Response of the Office of Chief Counsel, SECDivision of Investment Management, to Signature Financial Group, Inc.dated Dec. 28, 1999. SEC Ref. No. 99-825). Such conditions include that:(a) the redemption in kind is effected at approximately the feederfund's proportionate share of the master portfolio's current net assets;(b) the distributed securities are valued in the same manner as used incomputing the master portfolio's net asset value; (c) the distributionis consistent with the master portfolio's publicly disclosed redemptionpolicies and undertakings; (d) neither the redeeming feeder fund “norany other party with the ability and the pecuniary incentive toinfluence the redemption in kind” selects, or influences the selectionof, the distributed securities; (e) the redemption is effected pursuantto procedures adopted by the master portfolio's board of directors,including a majority of the independent directors, and they approve theredemption upon a finding that the redemption does not favor theredeeming feeder fund to the detriment of any other shareholder or favorthe master portfolio to the detriment of the redeeming feeder fund andis in the best interests of the master portfolio; and (f) specifiedrecords in connection with each redemption in kind are maintained for atleast six years after the end of the fiscal year in which the redemptionoccurs.

Embodiments of the present invention are configured to satisfy theseconditions using a master portfolio having feeder funds that include oneor more ETFs. An ETF feeder fund is configured to use in-kind purchasesand/or redemptions of master portfolio securities in a mannersubstantially similar to that conventionally used to issue and redeemETF shares. The securities a feeder ETF receives upon the in-kindpurchase of its shares by or through an Authorized Participant wouldgenerally be invested in the associated master portfolio to increase thefeeder ETF's investment therein. The securities a feeder ETF distributesin connection with an in-kind redemption of its shares by or through anAuthorized Participant would normally be sourced from the associatedmaster portfolio. To avoid favoring one set of feeder fund investorsover another, a master portfolio that utilizes in-kind purchases andredemptions for feeder ETFs may transact with its mutual fund feeders onthe same basis, accepting incremental investments primarily in the formof securities, rather than cash, and meeting redemptions also primarilyin securities. Since most mutual funds are designed to transact withtheir shareholders in cash, this would normally require a feeder mutualfund to use shareholder net cash inflows to buy (at the feeder fundlevel) securities that it then contributes to the master portfolio toincrease its investment therein, and to sell (at the feeder fund level)the securities it receives in connection with in-kind redemptions ofmaster portfolio interests to fund shareholder net cash outflows. Aslong as each feeder fund transacts with master portfolios on the samebasis, mutual funds and ETFs offered by the same sponsor and pursuingsubstantially similar investment programs may take advantage of theoperating efficiencies associated with pooling investments into acommonly managed entity. The benefits of using the master-feederstructure may be particularly advantageous for a newly formed ETF thatseeks to replicate an established mutual fund of the same sponsor.

For simplicity of presentation, the remaining Figures show and describeETF 16 as operating on a standalone basis (i.e., outside of anymaster-feeder arrangement) and serving as the ETF Party in NAV Swaptransactions with Market Makers. It should be understood that, inparticular embodiments, ETF 16 may be used in a master-feeder structuresuch as shown on FIG. 1A and/or may designate an affiliate of the ETF orother third party as the ETF Party to its NAV Swap transactions.

With reference to FIG. 1B, an automated Fund system 150, including asystem of networked, specially configured computers, may be used toimplement various transactions and data transfers associated withoperation of the embodiments described herein. The system 150 mayinclude an AP (Authorized Participant) workstation 152 and a Fund system160 for the Fund 16 (ETF). Fund system 160 may include Fund server 168,a database 162 containing information relating to the Fund portfoliosecurities and asset configurations, and database 164 containing datarelating to the Fund 16 and optionally, any additional Funds 12 and 14,such as identification information, password files, encryption keys,other access authorization and accounting (AAA) data. In this regard,Fund system 160 may optionally include AAA server 166 and a securitygateway 158. The various components communicate over network 156, whichmay be a public network such as the Internet, or a private networkincluding leased lines, or a virtual private network using virtualprivate network (VPN) protocols. System 150 may also include additionalFund systems 160′ and 160″, e.g., to embody Master Portfolio module 14and (Mutual) Fund module 12, respectively. Fund systems 160′ and 160″may be substantially similar to Fund system 160.

In particular embodiments, the various transactions and transfersdescribed herein may take place using the systems and components shownin FIG. 1B, although one of skill in the art will appreciate that manyvariations of the system may be implemented without departing from thescope of the invention. Suitable networking protocols may be used,including the Transport Control Protocol/Internet Protocol (TCP/IP)suite of protocols, and also including the HyperText Transport Protocol(HTTP) and associated security protocols HTTPS, and other mechanismssuch as Virtual Private Networking (VPN), Secure Sockets Layer (SSL),Transport Layer Security (TLS), tunneling protocols such as GenericRouting and Encapsulation (GRE), Layer 2 Tunneling Protocol (L2TP), andthe like. Another protocol that may be used to facilitate thetransactions and associated messaging described herein is the FinancialInformation eXchange (FIX) Protocol, which is a messaging standarddeveloped specifically for the real-time electronic exchange ofsecurities transactions. FIX is a public-domain specification owned andmaintained by FIX Protocol, Ltd. In addition, some of the transactionsmay be communicated in a manual fashion, such as via telephone ortextual messaging (email, and the like), whereupon the relevanttransaction information may be entered into the appropriate computersystems.

Turning now to FIG. 1C, a particular example of fund server 168 includesa series of modules, including Fund Module 180, Portfolio Module 182,Basket Module 184, Current Valuation Module 186, Swap Module 188, anoptional ETF Party Module 189, and Creation/Redemption Module 190, allof which are communicably coupled to one another and implemented by oneor more processors (FIG. 3 ). Fund Module 180 is configured to define anactively managed fund having a plurality of shares available for sale,the plurality of shares being tradable on one or more secondary markets.The Portfolio Module 182 is configured to track a fund portfolio ofassets held by the fund while maintaining confidentiality of at least aportion of the fund portfolio. Basket Module 184 is configured toidentify and publish a Fund Basket in the form of at least one of aCreation Basket and a Redemption Basket, the Fund Basket including asubset of the assets included in the fund portfolio. The CurrentValuation Module 186 is configured to calculate a current intraday netasset value (Intraday NAV) of the assets held by the fund, the IntradayNAV being calculated periodically throughout a trading day at apredetermined “NAV frequency”. The Current Valuation Module 186 is alsoconfigured to calculate and publish an indicative intraday value (IIV)of the assets held by the fund, the IIV being calculated and publishedthroughout the trading day at a predetermined “IIV frequency” and at apredetermined “IIV precision”. The Swap Module 188 is configured toestablish terms of, and provide for the periodic entry into and exitfrom, NAV Swaps (and/or alternative instruments with similar effect, asdescribed hereinbelow, all of which are collectively referred to hereinas ‘NAV Swaps’) between an ETF Party associated with the ETF, and SwapCounterparties, wherein the ETF Party and Swap Counterparties exchangepayments based on performance of the fund portfolio and the Fund Basket.The optional ETF Party Module enables parties affiliated with the ETF toengage the system. The Creation/Redemption Module 190 is configured toselectively permit creations and redemptions of fund shares by aqualified party, in exchange for the Fund Basket. These modulesinteroperate as discussed herein, to permit the qualified party toeffect arbitrage between a current market price of the fund shares andthe Intraday NAV in absence of full disclosure of said fund portfolio.

Having described exemplary embodiments of a system in accordance withthe present invention, methods of using these embodiments, includingoperation of automated fund system 150, will now be described asillustrated by FIGS. 2A-3D.

FIGS. 2A-2D show representations of an arbitrage mechanism that may beemployed, e.g., by a Market Maker 202 or other Authorized Participantusing AP workstation 152 (FIG. 1B), using the output generated byembodiments of the present invention. As shown and described, the MarketMaker 202 may receive and use the output generated by the CurrentValuation Module 186 and the Basket Module 184 (FIG. 1C) to then sell(FIGS. 2A, 2B) or buy (FIGS. 2C, 2D) shares of ETF 16 in secondarymarket transactions.

FIG. 2A illustrates how the system 160 may be used in the event thecurrent market price of the ETF shares exceeds the Intraday NAV asprovided by Current Valuation Module 186. As shown, Market Maker 202borrows shares of ETF 16 from a Securities Lender 204 at 206 (inexchange for posting collateral at 207) and sells them at 208 (for cash209) in secondary market transactions on an exchange (e.g., with RetailInvestors 210). (It should be recognized that the terms “RetailInvestors” 210 and “Securities Markets” 216 are used interchangeablyherein to with reference to conventional secondary market transactions.)At approximately the same time, Market Maker 202 purchases an equivalentquantity of the securities (e.g., using the cash received at 209)constituting ETF 16's current Modified Basket Portfolio (including anyBeta Patch Portfolio) for creations (as determined by Basket Module 184,FIG. 1C) at 218, via Securities Markets 216. Market Maker 202 alsoenters into a NAV Swap (or alternative instruments with similar effect)with ETF 16 (or other ETF Party designated by the ETF 16, via SwapModule 188 and optionally, ETF Party Module 189) at 212 with a notionalvalue corresponding to the value of the ETF 16 shares sold at 208,paying the return at 214, generated by the Modified Basket Portfolio forcreations, as adjusted for any Alpha Patch Adjustment that applies,purchased at 218 and receiving the return generated by ETF 16's ETFPortfolio at 216. This process may be effectively repeated as desired.In this regard, each time the Market Maker 202 materially changes itsETF 16 share inventory position by buying or selling ETF 16 shares inthe secondary market e.g., at 208, it correspondingly adjusts the sizeof its NAV Swap position with ETF 16 at 212 and its holdings of theModified Basket Portfolio securities at 218. Near the end of each day,ETF 16 (via Basket Module 184) discloses the Modified Basket Portfoliofor creations that will apply on the next business day. Market Makeruses this information to make corresponding adjustments to its ModifiedBasket Portfolio holdings at 218, transacting at or near the marketclose.

As shown in FIG. 2B, when Market Maker's short position in ETF 16 growsto a Creation Unit of shares, Market Maker closes its position bytransacting with ETF 16 (through an Authorized Participant viaCreation/Redemption Module 190, FIG. 1C) to purchase a Creation Unit ofshares at 222. Market Maker delivers the acquired ETF 16 shares at 224to close its borrow position, receiving back its posted collateral at226, and settles the ETF 16 share acquisition 222 by delivering thesecurities (e.g., purchased from Securities Markets 216) and cash thatconstitute the current ETF 16 creation Basket Portfolio and paying thecreation fee that then applies at 228. Market Maker also terminates itsNAV Swap at 230 and sells its Beta Patch Portfolio position included inthe Modified Basket Portfolio at 232 on the secondary market 216.

FIG. 2C illustrates how the system 160 may be used in the event theIntraday NAV as provided by Current Valuation Module 186, exceeds thecurrent market price of the ETF shares. As shown in FIG. 2C, MarketMaker 202 buys shares of ETF 16 at 240 in secondary market transactions(e.g., with Retail Investors 210) on an exchange. At the same time,Market Maker 202 enters into a NAV Swap (or alternative instruments withsimilar effect) 242 with ETF 16 (or other ETF Party designated by theETF 16, via Swap Module 188 and optionally, ETF Party Module 189) with anotional value equivalent to the value of the ETF 16 shares purchased at240, paying 244 the return of ETF 16's ETF Portfolio and receiving 246the returns of ETF 16's current Modified Basket Portfolio (i.e., of thesame notional value as the shares purchased at 240, as determined byBasket Module 184, FIG. 1C) for redemptions (as adjusted for any AlphaPatch Adjustment that applies) at 246. Market Maker 202 then alsoborrows 248 and sells 250 an equivalent quantity of the securitiesconstituting ETF 16's current Modified Basket Portfolio (including anyBeta Patch Portfolio) for redemptions. Each time the Market Makermaterially changes its ETF 16 share inventory position by buying orselling ETF 16 shares in the secondary market, it correspondinglyadjusts the size of its NAV Swap position 242 with ETF 16 and its shortposition 250 in the Modified Basket Portfolio securities. Transacting ator near the market close, Market Maker adjusts its position in ModifiedBasket Portfolio securities at the end of each day corresponding to theday-to-day changes in ETF 16's disclosed Modified Basket Portfolio forredemptions.

As shown in FIG. 2D, when Market Maker's share ownership in ETF 16 growsto a Creation Unit of shares, Market Maker closes its position bytransacting with ETF 16 (through an Authorized Participant) to redeem260 a Creation Unit of shares in exchange for the Redemption Basket ofSecurities and Cash at 262 (as determined by Basket Module 184, FIG.1C). Market Maker 202 pays the redemption fee that then applies, anddelivers the Basket Portfolio securities it receives in settlement ofthe redemption at 262 to close its borrow position in such securities at264. At the same time, Market Maker terminates 265 its NAV Swap 242 andbuys the Beta Patch Portfolio holdings included in the Modified BasketPortfolio at 266 to close its short position therein.

It should be noted that in particular embodiments, the ETF 16 may itselfengage in the NAV Swaps as shown in the examples of FIGS. 2A-2D.Alternatively, the NAV Swaps may be transacted with any of various otherETF Parties that may be designated by ETF 16, e.g., using ETF PartyModule 189 which is communicably coupled to the ETF Fund module 202 andthe ETF Swap module 188, as shown in phantom in FIG. 1C. ETF PartyModule 189 is configured for being operated by the ETF 16, an affiliateof the ETF, such as its investment advisor, administrator, custodian ora broker-dealer subsidiary of any of the foregoing, or other third partydesignated by the fund as ETF Party.

By applying embodiments of the present invention as shown on FIGS.2A-2D, Market Maker or other Authorized Participant earns arbitrageprofits from secondary market trading in shares of ETF 16 to the extentthat it either: (a) sells ETF 16 shares at an aggregate premium to theirthen-current values and/or purchases creation Basket Portfoliosecurities at an aggregate discount to their current market values that,in total, exceed the creation fee that applies plus the cost to theMarket Maker of establishing and maintaining its hedge position usingNAV Swaps and market transactions in Modified (creation) BasketPortfolio securities or (b) buys ETF 16 shares at an aggregate discountto their then-current values and/or sells redemption Basket Portfoliosecurities at an aggregate premium to their current market values that,in total, exceed the redemption fee that applies plus the cost to theMarket Maker of establishing and maintaining its hedge position usingNAV Swaps and market transactions in Modified (redemption) BasketPortfolio securities. Market Maker's ability to earn arbitrage profitsfrom market making activity in ETF 16 is not meaningfully different fromETFs that are fully transparent. Accordingly, ETF 16 should trade withcomparable bid-offer spreads and similar premiums and discounts tounderlying portfolio value, even as it maintains the confidentiality ofcurrent portfolio trading information.

These embodiments thus provide a relatively simple and reliableopportunity for the Market Maker 202 to profit from the spread betweenthe Intraday NAV and the current market price. These embodiments aretherefore expected to advantageously tighten the spread, i.e., to narrowthe premium or discount of market trading prices to underlying portfoliovalue, to support efficient secondary market trading for activelymanaged ETFs while maintaining the confidentiality of the ETF's currentportfolio trading information.

Having shown and described various embodiments of the present invention,optional variations thereof will now be discussed, which cover adjacentmethods, purposes, and fields of use:

1. Index-Based Exchange-Traded Funds.

By their terms, the foregoing embodiments apply to actively managedETFs. Like actively managed ETFs, index-based ETFs may seek to notdisclose their full portfolio holdings on a current daily basis to avoidother market participants learning to anticipate and profit from theETF's trading activity (known as “front-running”) or for other purposes.Thus, embodiments of the present invention apply to substantially alltypes of ETFs, whether actively managed or index-based.

2. Instruments Similar in Effect to Intraday Net Asset Value Swaps.

As described hereinabove, the foregoing embodiments cover intraday NAVSwaps entered into between an ETF Party (the ETF, its investmentadviser, custodian or other affiliate, or other designated third party)and one or more Swap Counterparties that are Market Makers in the ETF'sshares. Under a NAV Swap, the ETF Party and Swap Counterparty exchangepayments based on the relative returns of the ETF's holdings as of theend of the previous Business Day (ETF Portfolio) and a publiclydisclosed Basket Portfolio, Modified Basket Portfolio or other ReferencePortfolio (Disclosed Reference Portfolio). It should be recognized thatwhile it may describe a particular investment instrument, as usedherein, the term ‘NAV Swap’ also includes any number of alternativeinstruments capable of providing a similar effect, including, withoutlimitation: financial futures; options on financial futures; forwardforeign currency exchange contracts and currency futures; put options;call options; interest rate swaps, caps, floors and/or collars;transactions in physical securities; and combinations thereof. Thus, asused herein, the term ‘NAV Swap’ encompasses substantially any financialinstrument that may be used to effect exchanges of value between an ETFParty and an Arbitrageur Counterparty based on the relative returns ofthe ETF Portfolio and the Disclosed Reference Portfolio. As used herein,the term ‘Swap Counterparty’ and/or ‘Swap Counterparties’ refers to theArbitrageur Counterparty in any of the aforementioned NAV Swaps. Theseembodiments thus include substantially all methods for an ETF Party andan Arbitrageur Counterparty to effect exchanges of value betweenthemselves based on the relative returns of the ETF Portfolio andDisclosed Reference Portfolio, whether using NAV Swaps, other derivativeinstruments, transactions in physical securities or any combinationthereof.

3. Multiple Methods of Determining Intraday Net Asset Values of ETFPortfolios and/or Disclosed Reference Portfolios.

As described hereinabove, the foregoing embodiments apply to NAV Swapsin which valuations of constituent investments of an ETF Portfolio andDisclosed Reference Portfolio may be based on most recent market tradingprices, current bid-offer midpoints or other measures of current netasset value (NAV). In certain applications, it may be advantageous for asubject ETF to make available to Swap Counterparties more than one NAVSwap facility, which differ based on the method of determining intradayvalues of the ETF Portfolio and/or the Disclosed Reference Portfolio. Inaddition to most recent market trading prices and current bid-offermidpoints, valuations for NAV Swap purposes may, for example, be basedon bid-side or offer-side prices of constituent investments ordeterminations of fair value that reflect market movements since aconstituent investment most recently traded. These alternativeapproaches thus encompass the use of one or more NAV Swap facilities (oralternative instruments with similar effect) that apply various methodsto determine intraday values of ETF Portfolios and/or DisclosedReference Portfolios.

4. Use of NAV Swaps (and Alternative Instruments with Similar Effect) toFacilitate Efficient Secondary Market Trading of ETF Shares, Whether ornot in the Absence of Full Portfolio Holdings Disclosure.

As described hereinabove, the foregoing embodiments describe theapplication of NAV Swaps to ETFs that do not disclose their fullportfolio holdings on a current daily basis to avoid other marketparticipants front-running the ETF's trades and/or for other purposes.In addition to facilitating efficient secondary market trading of ETFsthat do not disclose their full holdings each Business Day, NAV Swaps(and alternative instruments with similar effect) may also be used tofacilitate better secondary market trading of ETFs that provide fulldaily holdings disclosure. ETFs whose portfolio investments includesecurities and other instruments that trade outside U.S. market hours(Foreign Investments) customarily trade with wider bid-ask spreads andmore variable premiums/discounts to NAV than ETFs that hold onlyinvestments that trade during U.S. market hours (U.S. Investments),reflecting the greater challenges to efficient arbitrage imposed by anETF holding Foreign Investments. Whereas Market Makers in shares of ETFsholding only U.S. Investments can readily lay off their intraday ETFshare inventory risk by simultaneously selling or buying offsettingamounts of the ETF's constituent investments as they buy or sell ETFshares over the course of the trading day, that option is notcustomarily available for ETFs that hold Foreign Investments. To helpsupport efficient secondary market trading in its shares, an ETF holdingForeign Investments may establish NAV Swap facilities with Market Makersand other arbitrageurs, whereby the ETF Party and ArbitrageurCounterparty would exchange payments based on the relative returns ofthe ETF Portfolio and a Disclosed Reference Portfolio that consists ofsecurities correlated to the ETF's holdings that trade during U.S.market hours. By (i) buying and selling the securities that constitutethe Disclosed Reference Portfolio and (ii) adjusting its NAV Swappositions with the ETF Party, a Market Maker in shares of an ETF holdingForeign Investments could manage its intraday ETF share inventory riskwith substantially the same level of precision as for ETFs holding U.S.Investments, positioning the ETF to trade with narrower bid-ask spreadsand less variable premiums/discounts to NAV than other ETFs that holdsimilar Foreign Investments. For ETFs holding certain types ofless-liquid U.S. Investments, use of NAV Swaps may also promote moreefficient secondary market trading. These alternative approaches thusencompass use of NAV Swaps and alternative instruments with similareffect to facilitate efficient secondary market trading in ETF shares,irrespective of whether the subject ETF discloses its full holdings on acurrent daily basis.

5. Flexibility in Determination of Disclosed Reference Portfolio Used inNAV Swaps.

As described hereinabove, the foregoing embodiments apply to NAV Swapsin which the Disclosed Reference Portfolio may be an ETF's currentcreation Basket Portfolio, current redemption Basket Portfolio or aModified Basket Portfolio that varies from the ETF's current creation orredemption Basket Portfolio to include positions in index ETFs, indexfutures contracts or other executable market instruments representativeof the incremental aggregate market exposure of the ETF's current ordesired portfolio composition versus the creation or redemption BasketPortfolios. (The foregoing embodiments describe variations between anETF's Modified Basket Portfolio and the relevant Basket Portfolio as“Beta Patch Adjustments.”) In certain applications, it may beadvantageous for a subject ETF to employ in NAV Swaps a DisclosedReference Portfolio that has little or no overlap with the ETF's currentcreation or redemption Basket Portfolios. Additionally, in certainapplications, a subject ETF may benefit from simultaneously utilizingmultiple NAV Swap facilities, each based on a different DisclosedReference Portfolio, or by changing the composition of the DisclosedReference Portfolio for an NAV Swap more than once each Business Day.These alternative embodiments thus encompass the use in NAV Swaps ofDisclosed Reference Portfolios that include executable marketinstruments of various descriptions as determined by the subject ETF anddisclosed prospectively to the Swap Counterparties. These alternateembodiments may also include a subject ETF's simultaneous utilization ofmultiple NAV Swap facilities, each based on a different DisclosedReference Portfolio, and use of NAV Swaps for which the DisclosedReference Portfolio changes intraday.

6. Flexibility in Determination of Supplemental Payments in Connectionwith NAV Swaps.

As described hereinabove, under the foregoing embodiments, the terms ofNAV Swaps may provide for the returns of the ETF Portfolio or DisclosedReference Portfolio for purposes of intraday valuations and payments atsettlement to be adjusted upward or downward by a predetermined amountto reflect, for example, the ETF Party's projection of the (unadjusted)relative performance of the two portfolios. (These are described as“Alpha Patch Adjustments.”) An Alpha Patch Adjustment that anticipatesoutperformance of the ETF Portfolio over the Disclosed ReferencePortfolio would increase a Market Maker's cost to hedge short positionsin ETF shares, and decrease its cost to hedge long positions in ETFshares. In certain applications, it may be advantageous for NAV Swaps toincorporate supplemental payments different than the Alpha PatchAdjustments described hereinabove. These alternative embodiments thusencompass the use in NAV Swaps of built-in supplemental payments ofvarious descriptions, which may or may not relate to the subject ETF'sexpectation of relative performance of the ETF Portfolio versus theDisclosed Reference Portfolio. Such payments may include, for example,amounts varying based on the number of discrete NAV Swap transactionsentered into or the notional value of outstanding NAV Swap positions.Moreover, these alternative embodiments provide for NAV Swapsupplemental payments that apply substantially equally to ETF Partiesand Swap Counterparties, or only to a single counterparty.

7. NAV Swaps Addressing Basis Risk Between Creation/Redemption BasketPortfolios and Disclosed Reference Portfolios.

ETFs holding Foreign Investments commonly include in their creationand/or redemption Basket Portfolios securities and other instrumentsthat are not available for purchase or sale in public markets at timescorresponding to when the subject ETF's daily NAVs and the valuation ofBasket Portfolio instruments for creation and redemption purposes aredetermined, generally 4:00 PM Eastern time. Market Makers and otherarbitrageur's in an ETF including Foreign Instruments in its creationand redemption Basket Portfolios frequently enter into transactions inderivative instruments and/or physical securities to seek to hedge theirrisk exposure to creation/redemption Basket Portfolio instruments inwhich they hold positions during the time interlude between when suchinstruments are valued for creation and redemption purposes (generally4:00 PM Eastern time) and when they are available for purchase or salein public markets. The basis risk assumed by Market Makers and otherarbitrageurs with respect to Foreign Instruments included increation/redemption Basket Portfolios during this time interval(Creation/Redemption Basket Overnight Basis Risk) is often a majorcontributor to their overall risk of arbitraging the subject ETF'sshares. These alternative embodiments encompass NAV Swaps designed toaddress Creation/Redemption Basket Overnight Basis Risk, whereby an ETFParty and Arbitrageur Counterparty agree to exchange payments based on(i) the relative returns of a specified creation or redemption BasketPortfolio (or a subset thereof) and a Designated Reference Portfoliothat is representative of hedging instruments with respect to suchBasket Portfolio (or subset thereof) available to arbitrageurs over timeperiods outside U.S. market trading hours and/or (ii) the relativereturns of the current ETF Portfolio and a Designated ReferencePortfolio that is representative of hedging instruments with respect tothe current ETF Portfolio (or subset thereof) available to arbitrageursover time periods outside U.S. market hours. An ETF Party andArbitrageur Party may use NAV Swaps to address Creation/RedemptionBasket Overnight Basis Risk arising in connection with one or more ofthe following transactions: (i) the earlier (than the time of theassociated ETF share creation) purchase of creation Basket Portfolioinstruments to be contributed to an ETF to effect a creation (purchase)of the ETF's shares; (ii) the earlier (than the time of the associatedETF share redemption) sale of redemption Basket Portfolio instruments tobe received from an ETF in a redemption of the ETF's shares; (iii) thelater (than the time of the associated ETF share creation) purchase ofcreation Basket Portfolio instruments contributed to an ETF to effect acompleted creation (purchase) of the ETF's shares; and (iv) the later(than the time of the associated ETF share redemption) sale ofredemption Basket Portfolio instruments received from an ETF in acompleted redemption of the ETF's shares.

FIG. 3 shows a diagrammatic representation of a machine in the exemplaryform of a computer system 300 within which a set of instructions, forcausing the machine to perform any one of the methodologies discussedabove, may be executed. In alternative embodiments, the machine mayinclude a network router, a network switch, a network bridge, PersonalDigital Assistant (PDA), a cellular telephone, a web appliance or anymachine capable of executing a sequence of instructions that specifyactions to be taken by that machine.

The computer system 300 includes a processor 302, a main memory 304 anda static memory 306, which communicate with each other via a bus 308.The computer system 300 may further include a video display unit 310(e.g., a liquid crystal display (LCD), plasma, cathode ray tube (CRT),etc.). The computer system 300 may also include an alpha-numeric inputdevice 312 (e.g., a keyboard or touchscreen), a cursor control device314 (e.g., a mouse), a drive (e.g., disk, flash memory, etc.,) unit 316,a signal generation device 320 (e.g., a speaker) and a network interfacedevice 322.

The drive unit 316 includes a computer-readable medium 324 on which isstored a set of instructions (i.e., software) 326 embodying any one, orall, of the methodologies described above. The software 326 is alsoshown to reside, completely or at least partially, within the mainmemory 304 and/or within the processor 302. The software 326 may furtherbe transmitted or received via the network interface device 322. For thepurposes of this specification, the term “computer-readable medium”shall be taken to include any medium that is capable of storing orencoding a sequence of instructions for execution by the computer andthat cause the computer to perform any one of the methodologies of thepresent invention. The term “computer-readable medium” shall accordinglybe taken to include, but not be limited to, solid-state memories, andoptical and magnetic disks.

Thus, a method and apparatus for effecting arbitrage between marketprice and underlying value of ETF shares in the absence of fullportfolio disclosure using intraday NAV Swaps have been described.Although the present invention has been described with reference tospecific exemplary embodiments, it will be evident that variousmodifications and changes may be made to these embodiments withoutdeparting from the broader spirit and scope of the invention.Accordingly, the specification and drawings are to be regarded in anillustrative rather than a restrictive sense.

Furthermore, embodiments of the present invention include a computerprogram code-based product, which includes a computer readable storagemedium having program code stored therein which can be used to instructa computer to perform any of the functions, methods and/or modulesassociated with the present invention. The non-transitory computerreadable medium includes any of, but not limited to, the following:CD-ROM, DVD, magnetic tape, optical disc, hard drive, floppy disk,ferroelectric memory, flash memory, ferromagnetic memory, opticalstorage, charge coupled devices, magnetic or optical cards, smart cards,EEPROM, EPROM, RAM, ROM, DRAM, SRAM, SDRAM, and/or any other appropriatestatic, dynamic, or volatile memory or data storage devices, but doesnot include a transitory signal per se.

It should be noted that the various modules and other components of theembodiments discussed hereinabove may be configured as hardware, ascomputer readable code stored in any suitable non-transitory computerusable medium, such as ROM, RAM, flash memory, phase-change memory,magnetic disks, etc., and/or as combinations thereof, without departingfrom the scope of the present invention.

It should be further understood that any of the features described withrespect to one of the embodiments described herein may be similarlyapplied to any of the other embodiments described herein withoutdeparting from the scope of the present invention.

In the preceding specification, the invention has been described withreference to specific exemplary embodiments for the purposes ofillustration and description. It is not intended to be exhaustive or tolimit the invention to the precise form disclosed. Many modificationsand variations are possible in light of this disclosure. It is intendedthat the scope of the invention be limited not by this detaileddescription, but rather by the claims appended hereto.

The above systems are implemented in various computing environments. Forexample, the present invention may be implemented on a conventional IBMPC or equivalent, multi-nodal system (e.g., LAN) or networking system(e.g., Internet, WWW, wireless web). All programming and data relatedthereto are stored in computer memory, static or dynamic ornon-volatile, and may be retrieved by the user in any of: conventionalcomputer storage, display (e.g., CRT, flat panel LCD, plasma, etc.)and/or hardcopy (i.e., printed) formats. The programming of the presentinvention may be implemented by one skilled in the art of computersystems and/or software design.

What is claimed is:
 1. A method for enabling arbitrage between marketprice and underlying value of Exchange-Traded Fund (ETF) shares in theabsence of full portfolio disclosure, to support efficient secondarymarket trading, the method comprising: (a) defining, with a Fund Module,an exchange-traded fund (ETF) having a plurality of ETF shares availablefor sale, the plurality of ETF shares being tradable on one or moresecondary markets; (b) tracking, with a Portfolio Module, a fundportfolio of assets held by the fund while maintaining confidentialityof at least a portion of the fund portfolio; (c) identifying andpublishing, with a Basket Module, a Fund Basket in the form of at leastone of a Creation Basket, a Redemption Basket, and a Modified Basketthat varies from the Creation Basket and/or Redemption Basket, the FundBasket including a subset of the assets held by the fund and/or anotherset of assets that trade during U.S. trading hours and are correlated tothe assets held by the fund; (d) calculating, with a Current ValuationModule, a current intraday net asset value (Intraday NAV) of the assetsheld by the fund, the Intraday NAV being calculated periodicallythroughout a trading day at an NAV frequency; (e) establishing, with aSwap Module, terms of, and providing for the periodic entry into andexit from, NAV Swaps between an ETF Party associated with the ETF, andSwap Counterparties, wherein the ETF Party and Swap Counterpartiesexchange payments based on performance of the fund portfolio and theFund Basket; (f) selectively permitting, with a Creation/RedemptionModule, creations and redemptions of the ETF shares by a qualifiedparty, in exchange for the Fund Basket; wherein the modules areprocessed by one or more computer processors; and wherein the qualifiedparty is permitted to effect arbitrage between a current market price ofsaid ETF shares and the Intraday NAV in absence of full disclosure ofsaid fund portfolio and/or in which said fund portfolio includesnon-U.S. assets, to support efficient secondary market trading.
 2. Themethod of claim 1, wherein the ETF is actively managed or index-based.3. The method of claim 2, wherein the NAV Swaps include one or more of:NAV Swaps; financial futures; options on financial futures; forwardforeign currency exchange contracts and currency futures; put options;call options; interest rate swaps, caps, floors and/or collars;transactions in physical securities; and combinations thereof.
 4. Themethod of claim 2, wherein said calculating (d) further comprisescalculating, with the Current Valuation Module, the current intraday netasset value (Intraday NAV) of the assets held by the ETF and of the FundBasket, using one or more of: most recent market trading prices; currentbid-offer midpoints; bid-side or offer-side prices of constituentinvestments; determinations of fair value based on market movementssince a constituent investment most recently traded; and combinationsthereof.
 5. The method of claim 2, wherein said identifying andpublishing (c) further comprises identifying and publishing a ModifiedBasket that varies from the Creation and/or Redemption Basket to includepositions in one or more of: index ETFs; index futures contracts; and/orother executable market instruments representative of a difference inmarket exposures of the ETF relative to the Creation and/or RedemptionBasket.
 6. The method of claim 5, further comprising identifying andpublishing a plurality of mutually distinct Modified Baskets.
 7. Themethod of claim 6, further comprising varying the composition of theCreation Basket, Redemption Basket, and/or Modified Basket periodicallythroughout the trading day.
 8. The method of claim 7, wherein saidestablishing (e) further comprises mutually distinct sets of said NAVSwaps for mutually distinct Fund Baskets.
 9. The method of claim 2,wherein the Swap Module configures the NAV Swaps to provide for saidexchange of value to address overnight basis risk in connection withassets held by the ETF that trade outside of U.S. trading hours.
 10. Themethod of claim 9, wherein the Swap Module configures the NAV Swaps toprovide for said exchange of value to address Market Makers' overnightbasis risk in connection with one or more of the following transactions:(i) the earlier (than time of the ETF share creation) purchase ofCreation Basket assets to be contributed to an ETF to effect a creationof the ETF shares; (ii) the earlier (than time of the ETF shareredemption) sale of Redemption Basket assets to be received from an ETFin a redemption of the ETF shares; (iii) the later (than time of the ETFshare creation) purchase of Creation Basket assets contributed to an ETFto effect a completed creation of the ETF shares; and (iv) the later(than time of the ETF share redemption) sale of Redemption Basket assetsreceived from an ETF in a completed redemption of the ETF shares. 11.The method of claim 2, further comprising enabling the ETF Party toaccess the Fund Module and the Swap Module using an ETF Party Module,the ETF Party module configured for being operated by one or more of theETF, and an affiliate of the ETF.
 12. The method of claim 11, furthercomprising identifying and publishing, with the Basket Module, a BetaPatch Portfolio representing a difference in market exposure between thefund portfolio and the Fund Basket.
 13. The method of claim 12, furthercomprising identifying and publishing, with the Basket Module, a FundBasket in the form of a Modified Basket Portfolio that combines the atleast one Creation Basket and Redemption Basket, with one or moreassociated Beta Patch Portfolios.
 14. The method of claim 13, furthercomprising identifying and publishing, with the Basket Module, aVariance Portfolio that represents a difference between the fundportfolio and either the Creation Basket Portfolio, the RedemptionBasket Portfolio, or the Modified Basket Portfolio.
 15. The method ofclaim 14, further comprising establishing, with the Swap Module, termsfor the NAV Swaps in which the ETF Party and the Swap Counterpartiesmake and receive payments based on performance of the fund portfoliorelative to one or more of the Basket Portfolio, the Modified BasketPortfolio, and the Variance Portfolio.
 16. The method of claim 15,further comprising establishing, with the Swap Module, terms for the NAVSwaps in which the ETF Party and the Swap Counterparties make andreceive supplemental payments based on numbers of discrete NAV Swaptransactions entered into and/or the notional value of outstanding NAVSwap positions.
 17. The method of claim 16, further comprising applying,with the Swap Module, the supplemental payments substantially equally toETF Parties and Swap Counterparties, or only to a single counterparty.18. The method of claim 15, further comprising determining andintegrating, with the Swap Module, one or more Alpha Patch Adjustmentsinto the NAV Swaps, the Alpha Patch Adjustments including an adjustmentto compensate for any expected difference in performance of the fundportfolio relative to the Basket Portfolio, the Modified BasketPortfolio, or the Variance Portfolio.
 19. The method of claim 15,further comprising calculating, with the Current Valuation Module, theIntraday NAVs of one or more of the Beta Patch Portfolio, ModifiedBasket Portfolio, and Variance Portfolio.
 20. The method of claim 1,further comprising calculating and publishing, with the CurrentValuation Module, an indicative intraday value (IIV) of the assets heldby the fund, the IIV being calculated and published throughout thetrading day at an IIV frequency and an IIV precision.
 21. The method ofclaim 1, maintaining, with the Current Valuation Module, the IntradayNAV in confidence.
 22. The method of claim 1, wherein the subset ofassets includes up to about 95 percent of the assets of said portfolioof assets.
 23. The method of claim 22, wherein the subset of assetsincludes up to about 80 percent of the assets of said portfolio ofassets.
 24. The method of claim 1, wherein the Fund Basket comprises thesubset of assets plus cash.
 25. The method of claim 1, comprisingidentifying and publishing, with the Basket Module, the Fund Basket onceeach trading day.
 26. The method of claim 1, comprising calculating,with the Current Valuation Module, the intraday NAV with greaterprecision than the IIV precision.
 27. The method of claim 1, furthercomprising determining and disclosing, with a Fee Module, daily creationand redemption fees that increase or decrease with changes in estimatedcosts to the fund of trading to conform the Fund Basket to the fundportfolio.
 28. The method of claim 1, wherein the Fund Module defines anactively managed feeder fund in a master-feeder configuration, with theCreation/Redemption Module enabling the creations and redemptions at afeeder level, and wherein the feeder fund feeds into a master portfoliowhich includes the fund portfolio.
 29. The method of claim 28, furthercomprising defining, with another Fund Module, another feeder fund thatfeeds into the master portfolio.
 30. The method of claim 1, comprisingselectively permitting, with the Creation/Redemption Module, theintraday creations and redemptions by a qualified party that has enteredinto a confidentiality agreement with the fund, wherein the intradaycreations and redemptions are effected electronically via a usercomputer communicably coupled to the Creation/Redemption Module.
 31. Themethod of claim 1, establishing and maintaining, with the Fund Module,two or more share classes, including a first class of shares beingholdable only by the qualified party under agreement with the fund, anda second class being holdable without restriction.
 32. The method ofclaim 31, wherein the first class of shares may be exchanged for thesecond class of shares with an Authorized Party.